---

UNITED STATESSECURITIES
AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 10-Q

[X] Quarterly Report Pursuant To Section 13 or 15(d) of the
Securities Exchange Act of 1934.For the quarterly period ended: December 31,
2010

OR

[_] Transition Report Pursuant To Section 13 or 15(d) of the
Securities Exchange Act of 1934.For the transition period from: to

Commission File Number: 000-030813

AlphaRx, Inc.(Name of Small Business
Issuer in its Charter)

|Delaware                        | 98-0416123                          
|------------------------------- | ------------------------------------
|(State or other jurisdiction of | (I.R.S. Employer Identification No.)
|incorporation or organization)  |                                     

168 Konrad Crescent, Suite 200 Markham, Ontario, Canada L3R
9T9 (Address of principal executive offices)

Registrant's telephone number, including area code: (905)
479-3245

Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [   ]

Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation
S-T (§232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files).
Yes[  ] No [X]

Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of large accelerated filer,
accelerated filer, and smaller reporting company in rule 12b-2 of the
Exchange Act.

|Large accelerated filer [   ]                                                  | Accelerated filer  [   ]      
|------------------------------------------------------------------------------ | ------------------------------
|Non-accelerated filer [   ]  (Do not check if a smaller
    reporting company) | Smaller
reporting company  [X]

Indicate by check mark whether the registrant is a shell
company (as defined in Rule 12b-2 of the Exchange Act). Yes [   ] No [X]

The number of outstanding shares of registrant's Common Stock
on February 14, 2011 was 94,635,047.

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ALPHARX, INC.FORM 10-QDECEMBER31, 2010TABLE OF CONTENTS

|Part I:  | Financial
      Information                                                                                                                                   |             
|-------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------
|Item 1.  | Financial Statements.                                                                                                                                         |             
|         | Unaudited Interim
      Consolidated Balance Sheets as of December 31 2010 and September 30, 2010
      (Audited)                                             | 3           
|         | Unaudited Interim Consolidated
      Statements of Operations and Comprehensive Loss for the three months ended
      December 31, 2010 and December 31, 2009 | 4           
|         | Unaudited Interim
      Consolidated Statements of Changes in Shareholders Deficit as of December
      31, 2010 and September 30, 2010                      | 5           
|         | Unaudited Interim Consolidated
      Statements of Cash Flow for the three months ended December 31, 2010 and
      December 31, 2009                         | 6           
|         | Condensed
      Notes to Unaudited Interim Consolidated Financial Statements                                                                                  | 7
      - 11
|Item 2.  | Managements Discussion and
      Analysis of Financial Condition and Results of Operation                                                                    | 12 - 16     
|Item 3.  | Quantitative and
      Qualitative Disclosures About Market Risk.                                                                                             | 16          
|Item 4.  | Controls and Procedures.                                                                                                                                      | 16          
|Part II: | Other Information                                                                                                                                             |             
|Item 1.  | Legal Proceedings.                                                                                                                                            | 17          
|Item 1A. | Risk Factors.                                                                                                                                                 | 17          
|Item 2.  | Unregistered Sales of Equity
      Securities and Use of Proceeds.                                                                                            | 18          
|Item 3.  | Defaults Upon
      Senior Securities.                                                                                                                        | 18          
|Item 4.  | (Removed and Reserved).                                                                                                                                       | 18          
|Item 5.  | Other
      Information.                                                                                                                                      | 18          
|Item 6.  | Exhibits.                                                                                                                                                     | 18          

2

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PART I: FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

ALPHARx, INC.INTERIM CONSOLIDATED BALANCE
SHEETSAS AT DECEMBER 31, 2010 AND SEPTEMBER 30, 2010(All
amounts in US Dollars)

|                                                                                                                                                                      |   | December 31, |   |   | September 30, |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------- | - | ------------ | - | - | ------------- | -
|                                                                                                                                                                      |   | 2010         |   |   | 2010          |  
|                                                                                                                                                                      |   | (UNAUDITED)  |   |   | (AUDITED)     |  
|                                                                                                                                                                      |   |              |   |   |               |  
|CURRENT ASSETS                                                                                                                                                        |   |              |   |   |               |  
|                                                                                                                                                                      |   |              |   |   |               |  
|Cash and Cash
      Equivalents                                                                                                                                       | $ | 16,524       |   | $ | 16,264        |  
|Accounts Receivable                                                                                                                                                   |   | 93,287       |   |   | 147,839       |  
|TOTAL CURRENT ASSETS                                                                                                                                                  |   | 109,811      |   |   | 164,103       |  
|                                                                                                                                                                      |   |              |   |   |               |  
|PROPERTY, PLANT and
      EQUIPMENT, net                                                                                                                              |   | 33,359       |   |   | 43,078        |  
|                                                                                                                                                                      |   |              |   |   |               |  
|TOTAL ASSETS                                                                                                                                                          |   | 143,170      |   |   | 207,181       |  
|                                                                                                                                                                      |   |              |   |   |               |  
|CURRENT LIABILITIES                                                                                                                                                   |   |              |   |   |               |  
|Accounts Payable and Accrued
      Liabilities                                                                                                                        |   | 602,888      |   |   | 520,342       |  
|Notes Payable
      (Note 3)                                                                                                                                          |   | 840,517      |   |   | 790,671       |  
|Deferred Revenue                                                                                                                                                      |   | -            |   |   | 0             |  
|TOTAL CURRENT LIABILITIES                                                                                                                                             |   | 1,443,405    |   |   | 1,311,013     |  
|                                                                                                                                                                      |   |              |   |   |               |  
|                                                                                                                                                                      |   |              |   |   |               |  
|STOCKHOLDERS DEFICIENCY                                                                                                                                              |   |              |   |   |               |  
|Common Stock: $ 0.0001 par
      value, Authorized: 250,000,000 shares; Issued and
      outstanding December 31 and September 30,
      2010- 94,635,047 (Notes 5-7) |   | 9,464        |   |   | 9,464         |  
|                                                                                                                                                                      |   |              |   |   |               |  
|Additional
      paid-in capital                                                                                                                                      |   | 17,501,702   |   |   | 17,500,855    |  
|Deficit                                                                                                                                                               |   | (18,990,468  | ) |   | (18,789,891   | )
|Accumulated
      Other Comprehensive Loss                                                                                                                            |   | (4,046       | ) |   | (2,284        | )
|Non-controlling Interest                                                                                                                                              |   | 183,113      |   |   | 178,024       |  
|TOTAL DEFICIENCY                                                                                                                                                      |   | (1,300,235   | ) |   | (1,103,832    | )
|                                                                                                                                                                      |   |              |   |   |               |  
|TOTAL LIABILITIES AND
      DEFICIENCY                                                                                                                                | $ | 143,170      |   | $ | 207,181       |  

|Signed: Michael Lee | Signed: Dr. Ford Moore
|------------------- | ----------------------
|Director            | Director              

See condensed notes to unaudited consolidated financial
statements

3

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ALPHARx, INC.INTERIM CONSOLIDATED STATEMENTS OF
OPERATIONS AND COMPREHENSIVE LOSSFOR THE THREE MONTHS ENDED DECEMBER
31, 2010 AND 2009(UNAUDITED) (All amounts in US
Dollars)

|                                                                                      |   | December 31, |  
|------------------------------------------------------------------------------------- | - | ------------ | -
|                                                                                      |   | 2010         |  
|                                                                                      |   |              |  
|                                                                                      |   |              |  
|Consulting Revenue                                                                    | $ | -            |  
|License Fees and Royalties                                                            |   | 22,830       |  
|TOTAL REVENUES                                                                        |   | 22,830       |  
|                                                                                      |   |              |  
|General and Administrative
      Expenses                                             |   | 169,728      |  
|Research and Development Expenses                                                     |   | 13,646       |  
|Depreciation                                                                          |   | 9,654        |  
|LOSS FROM OPERATIONS                                                                  |   | (170,198     | )
|                                                                                      |   |              |  
|OTHER EXPENSES                                                                        |   |              |  
|                                                                                      |   |              |  
|Interest Expense, net                                                                 |   | (25,054      | )
|                                                                                      |   |              |  
|LOSS BEFORE INCOME TAXES                                                              |   | (195,253     | )
|                                                                                      |   |              |  
|Income Tax                                                                            |   | -            |  
|                                                                                      |   |              |  
|NET LOSS                                                                              |   | (195,253     | )
|                                                                                      |   |              |  
|Net Income/Loss
      attributable to Non-controlling interests                       |   | 3,902        |  
|                                                                                      |   |              |  
|NET LOSS ATTRIBUTABLE TO ALPHARX INC.
      STOCKHOLDERS                              |   | (191,351     | )
|                                                                                      |   |              |  
|COMPREHENSIVE LOSS                                                                    |   |              |  
|Net Loss                                                                              |   | (195,253     | )
|Translation Adjustment                                                                |   | (2,203       | )
|Comprehensive Loss                                                                    |   | (197,456     | )
|Less: Comprehensive Loss/Income attributable
      to Non-controlling interests       |   | 441          |  
|COMPREHENSIVE LOSS
      ATTRIBUTABLE TO ALPHARX                                      |   |              |  
|INC. STOCKHOLDERS                                                                     | $ | (197,015     | )
|                                                                                      |   |              |  
|                                                                                      |   |              |  
|Per Share Data                                                                        |   |              |  
|Net Loss per Share, basic and diluted
      attributable to AlphaRx Inc. stockholders | $ | (0.002       | )
|Weighted Average Number of
      Common Shares Outstanding                            |   | 94,635,047   |  

See condensed notes to interim consolidated financial
statements

4

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ALPHARx, INC.INTERIM CONSOLIDATED STATEMENTS OF
CHANGES IN STOCKHOLDERS DEFICIENCYFOR THE PERIOD ENDED DECEMBER 31,
2010(UNAUDITED)(All amounts in US Dollars)

Common
      StockAccumulated
    
    
    
    
    
    Total AlphaRxAdditional
    
    
    Other
    
    
    
    
    
    Inc.
    
    
    Non-Number of
    
    
    
    
    
    Paid in
    
    
    Comprehensive
    
    
    
    
    
    Stockholders
    
    
    controlling
    
    
    TotalShares
    
    
    Amount
    
    
    Capital
    
    
    Loss
    
    
    Deficiency
    
    
    Deficiency
    
    
    Interest
    
    
    DeficiencyBalance as
      of September 30, 2009
    
    92,371,192
    
    $
    9,238
    
    $
    17,052,076
    
    
    (2,317
    )
    
    (18,061,820
    )
    
    (1,002,823
    )
    
    102,240
    
    
    (900,583
    )Warrants issued for services
    
    
    
    
    
    
    
    262,090
    
    
    
    
    
    
    
    
    262,090
    
    
    
    
    
    262,090Debt Conversion
    
    
    
    
    
    
    
    73,723
    
    
    
    
    
    
    
    
    73,723
    
    
    
    
    
    73,723Addl pickup of Equity by NCI
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    99,514
    
    
    99,514Stock issued for
      Service
    
    2,263,855
    
    
    226
    
    
    112,966
    
    
    
    
    
    
    
    
    113,192
    
    
    
    
    
    113,192Foreign Currency Translation
    
    
    
    
    
    
    
    
    
    
    33
    
    
    
    
    
    33
    
    
    
    
    
    33Non- controlling
      interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (23,730
    )
    
    (23,730
    )Net Loss 2010
    
    
    
    
    
    
    
    
    
    
    
    
    
    (728,071
    )
    
    (728,071
    )
    
    
    
    
    (728,071
    )Balance as
      of September 30, 2010
    
    94,635,047
    
    $
    9,464
    
    $
    17,500,855
    
    $
    (2,284
    )
    
    (18,789,891
    )
    $
    (1,281,856
    )
    $
    178,024
    
    $
    (1,103,832
    )Foreign Currency Translation
    
    
    
    
    
    
    
    
    
    
    (1,762
    )
    
    
    
    
    (1,762
    )
    
    (441
    )
    
    (2,203
    )Non- controlling
      interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,902
    )
    
    (3,902
    )Net Loss for the Period
    
    
    
    
    
    
    
    
    
    
    
    
    
    (191,351
    )
    
    (191,351
    )
    
    
    
    
    (191,351
    )Transaction Adjustment
    
    
    
    
    
    
    
    847
    
    
    
    
    
    (9226
    )
    
    (8,379
    )
    
    9,432
    
    
    1,053Balance as of December
      31, 2010
    
    94,635,047
    
    $
    9,464
    
    $
    17,501,702
    
    $
    (4,046
    )
    $
    (18,990,468
    )
    $
    (1,483,348
    )
    $
    183,113
    
    $
    (1,300,235
    )


See condensed notes to interim consolidated financial
statements

5

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ALPHARx, INC.INTERIM CONSOLIDATED STATEMENTS OF
CASH FLOWSFOR THE THREE MONTHS ENDED DECEMBER 31, 2010 AND 2009(UNAUDITED)(All amounts in US Dollars)

|Three months ended December 31,                                                   |   | 2010     |   |   | 2009     |  
|--------------------------------------------------------------------------------- | - | -------- | - | - | -------- | -
|                                                                                  |   |          |   |   |          |  
|CASH FLOWS FROM OPERATING
      ACTIVITIES                                        |   |          |   |   |          |  
|Net Loss                                                                          | $ | (195,253 | ) | $ | (122,215 | )
|Adjustments to reconcile net
      loss to net cash used in operating activities: |   |          |   |   |          |  
|Depreciation and amortization                                                     |   | 9,654    |   |   | 10,081   |  
|Prior period
      adjustment                                                     |   | 1,051    |   |   |          |  
|Changes in assets and
      liabilities:                                          |   |          |   |   |          |  
|Decrease (Increase) in accounts receivable                                        |   | 54,551   |   |   | 36,517   |  
|(Decrease) Increase in accounts payable and accrued liabilities                   |   | 82,543   |   |   | 43,051   |  
|Accrued interest on notes payable                                                 |   | 46,333   |   |   | 16,936   |  
|Increase (Decrease) in deferred revenue                                           |   | -        |   |   | (35,000  | )
|NET CASH USED IN OPERATING
      ACTIVITIES                                       |   | (1,121   | ) |   | (50,630  | )
|CASH FLOWS FROM INVESTING ACTIVITIES                                              |   |          |   |   |          |  
|Purchase of Machinery & Equipment, net of
      disposals                         |   | 65       |   |   | (5,691   | )
|NET CASH PROVIDED BY INVESTING ACTIVITIES                                         |   | 65       |   |   | (5,691   | )
|CASH FLOWS FROM FINANCING
      ACTIVITIES                                        |   |          |   |   |          |  
|Issuance (repayment) of Notes Payable, net                                        |   | 3,519    |   |   | 57,816   |  
|NET CASH PROVIDED BY
      FINANCING ACTIVITIES                                   |   | 3,519    |   |   | 57,816   |  
|Effect of exchange rate changes on cash and
      cash equivalents                |   | (2,203   | ) |   | 3,327    |  
|NET INCREASE (DECREASE) IN
      CASH                                             |   | 260      |   |   | 4,822    |  
|CASH, and cash equivalents, beginning of
      period                             |   | 16,264   |   |   | 14,006   |  
|CASH, and cash equivalents,
      end of period                                   | $ | 16,524   |   | $ | 18,828   |  
|                                                                                  |   |          |   |   |          |  
|                                                                                  |   |          |   |   |          |  
|SUPPLEMENTARY INFORMATION                                                         |   |          |   |   |          |  
|Taxes Paid                                                                        | $ | 0        |   | $ | 0        |  
|Interest Paid                                                                     | $ | 0        |   | $ | 0        |  

See condensed notes to interim consolidated financial
statements

6

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ALPHARX INC.CONDENSED NOTES TO UNADUDTED
INTERIMCONSOLIDATED FINANCIAL STATEMENTSDECEMBER 31,
2010(UNAUDITED)

NOTE 1. NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS

The accompanying interim unaudited consolidated financial
statements have been prepared in accordance with the instructions to Form 10-Q
and do not include all the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting of all recurring accruals) considered
necessary for fair presentation have been included. Operating results for the
interim periods are not necessarily indicative of the results that may be
expected for the year ended September 30, 2010. Interim unaudited consolidated
financial statements should be read in conjunction with the Companys annual
audited financial statements.

NOTE 2. NATURE OF BUSINESS AND GOING CONCERN

ALPHARx, INC. (the Company) was incorporated under the laws
of the State of Delaware on August 7, 1997. The company is an emerging
pharmaceutical company specializing in the formulation of human therapeutic
products using proprietary drug delivery technologies.

The interim unaudited consolidated financial statements reflect
the activities of AlphaRx Inc., 100% of AlphaRx Canada Limited and 80% of
AlphaRx International Holdings Limited and AlphaRx Life Sciences Ltd. (AIHs
wholly owned subsidiary) collectively the Company. All material inter-company
accounts and transactions have been eliminated.

The accompanying interim unaudited consolidated financial
statements have been prepared on a going concern basis, which contemplates the
realization of assets and the satisfaction of liabilities in the normal course
of business. Accordingly, they do not include any adjustments relating to the
realization of the carrying value of assets or the amounts and classification of
liabilities that might be necessary should the Company be unable to continue as
a going concern. Continuance of the Company as a going concern is dependent on
its future profitability and on the on-going support of its shareholders,
affiliates and creditors. Factors relating to going concern issues include
working capital deficiencies, operating losses, shareholders deficits, and
continued reliance on external funding sources. In order to mitigate the going
concern issues, the Company is constantly pursuing new business arrangements and
striving to achieve profitability, and seeking capital funding on an ongoing
basis via the issuance of promissory notes, and private placements. The Company
has contracted with several parties for research and development consulting
services that could also result in future license fees and royalties. The
Company has one licensee that provides an ongoing royalty stream for its
Indaflex product. The Company is constantly seeking out collaborative
arrangements with third parties in anticipation of license fees, royalties,
milestone payments and consulting services.

NOTE 3. NOTES PAYABLE

The Company issued $3,519 in promissory notes (Net of Amount
Repaid) during the three months ended December 31, 2010. These notes bear
interest at 12% per annum and are repayable on the first anniversary date of
issuance. Previously issued promissory notes bear interest at rates of 8% - 12%
per annum. Prepayment of these notes prior to the first anniversary date is
permitted.

See also note 8  Related Party Transactions.

NOTE 4. NON-CONTROLLING INTEREST

Effective June 22, 2006, AlphaRx International Holdings Ltd.
(AIH) issued 1,500 shares of its common stock to New Super Limited (NSL) at
a price of approximately $HK 6,667 per share or $HK 10 million in cash (USD
$1,288,826). There were 10,000 common shares outstanding of which 8,500 or 85%
belong to the Company. With the consolidation of only 85% of AIH, a
non-controlling interest was established, representing net amounts owing to the
non-controlling shareholder. The capital infusion into AIH is accounted for as
additional paid in capital on the interim consolidated financial statements of
the Company.

7

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On May 18, 2010, AlphaRx International Holdings Ltd. (AIH)
issued 625 shares of its common stock to New Super Limited (NSL) at a price of
approximately $HK 2,166 per share, or $HK1,353,750 in cash (USD$173,292),
representing a further 5% non-controlling interest and increasing the total of
the non-controlling interest to 20% after the infusion.

NOTE 5. COMMON STOCK

The Company is authorized to issue 250,000,000 shares of common
stock. As of December 31, 2010 there were 94,635,047 shares of Common Stock
issued and outstanding with a stated par value of $0.0001 per share.

NOTE 6. STOCK OPTION PLANS

The Company has one Stock Option Plan (the 2008 Stock Option
Plan) under which officers, key employees, certain independent contractors, and
independent directors may be granted options to purchase shares of the Companys
authorized but unissued Common Stock. All outstanding options currently expire
no later than June 30, 2012. Proceeds received by the Company from exercises of
stock options are credited to Common Stock and additional paid-in capital.

At the Companys Annual General Meeting held November 26, 2008
a majority of stockholders approved amendments to the existing Stock Option
Plans including, among others: (i) combining the 2004 and 2006 Plans into the
2008 Stock Option Plan for ease of administration; (ii) providing a cap for the
number of options to be issued at 22,000,000; (iii) providing guidelines for
exercise prices such that the exercise price of any newly granted option is
never less than the market value or in the case of a 10%+ holder, never less
than 110% of the market value on the date of grant; (iv) providing for a maximum
term of 5 years for any option granted; (v) provide for a vesting schedule
whereby vesting must occur over at least 18 months with no more than
1/6th of the options granted vesting in any 3 month period; (vi)
providing for the maximum number of options to be granted to any one individual
in any 12 month period to be no more than 5% of the issued and outstanding
common stock, and (vii) providing for a maximum number of options to be granted
to any Investor Relations party to be no more than 2% of the issued and
outstanding common stock.

As a result of the new terms governing the Companys 2008 Stock
Option Plan, the maximum number of options that can still be issued totals
4,310,000, regardless of whether existing options are exercised or cancelled.

During the three months ended December 31, 2010, no options
were granted and no options were exercised. Additional details of the 2008 Plan,
as at December 31, 2010 are as follows:

|                                                                                         |   |                 |   |  |                         |  |  |             |  |  |          |  |  |           |  |  |              | 
|---------------------------------------------------------------------------------------- | - | --------------- | - |  | ----------------------- |  |  | ----------- |  |  | -------- |  |  | --------- |  |  | ------------ | 
|                                                                                         |   | Number Granted, |   |  |                         |  |  |             |  |  | Share    |  |  |           |  |  |              | 
|                                                                                         |   | Exercised,      |   |  |                         |  |  |             |  |  | Price on |  |  |           |  |  | Remaining    | 
|2008 Stock                                                                               |   | Expired or      |   |  |                         |  |  | Exercise    |  |  | Grant    |  |  | Expiry    |  |  | Contractual  | 
|Option Plan                                                                              |   | Cancelled       |   |  | Issue Date              |  |  | Price $     |  |  | Date $   |  |  | Date      |  |  | Life (Years) | 
|                                                                                         |   |                 |   |  |                         |  |  |             |  |  |          |  |  |           |  |  |              | 
|Inception                                                                                |   | 0               |   |  |                         |  |  |             |  |  |          |  |  |           |  |  |              | 
|Granted                                                                                  |   | 12,720,000      |   |  | 15/11/2004              |  |  | 0.15        |  |  | 0.11     |  |  | 6/30/2012 |  |  | 1.5          | 
|Cancelled                                                                                |   | (6,000,000      | ) |  | 12/28/2007              |  |  | -           |  |  | -        |  |  | -         |  |  | -            | 
|Granted                                                                                  |   | 500,000         |   |  | 15/11/2004              |  |  | 0.40  0.50 |  |  | 0.11     |  |  | -         |  |  | -            | 
|Cancelled                                                                                |   | (40,000         | ) |  | 12/28/2007              |  |  | -           |  |  | -        |  |  | -         |  |  | -            | 
|Expired                                                                                  |   | (460,000        | ) |  | 2/10/2008               |  |  | -           |  |  | -        |  |  | -         |  |  | -            | 
|Granted                                                                                  |   | 7,000,000       |   |  | 10/1/2005               |  |  | 0.16        |  |  | 0.14     |  |  | 6/30/2012 |  |  | 1.5          | 
|Granted                                                                                  |   | 390,000         |   |  | 8/2/2005                |  |  | 0.15        |  |  | 0.14     |  |  | 6/30/2012 |  |  | 1.5          | 
|Cancelled                                                                                |   | (40,000         | ) |  | 12/28/2007              |  |  | -           |  |  | -        |  |  | -         |  |  | -            | 
|Granted                                                                                  |   | 100,000         |   |  | 5/25/2005               |  |  | 0.13        |  |  | 0.13     |  |  | 6/30/2012 |  |  | 1.5          | 
|Granted                                                                                  |   | 3,290,000       |   |  | 10/17/2005              |  |  | 0.075       |  |  | 0.08     |  |  | -         |  |  | -            | 
|Cancelled                                                                                |   | (560,000        | ) |  | 12/28/2007              |  |  | -           |  |  | -        |  |  | -         |  |  | -            | 
|Granted                                                                                  |   | 90,000          |   |  | 1/3/2007                |  |  | 0.10        |  |  | 0.10     |  |  | 1/3/2012  |  |  | 1            | 
|Exercised                                                                                |   | (2,730,000      | ) |  | 12/27/2007              |  |  | 0.075       |  |  | -        |  |  | -         |  |  | -            | 
|Remaining                                                                                |   | 14,260,000      |   |  | As at December 31, 2010
|Weighted Average
      Exercise Price and Contractual Life of Options Remaining in Years | $ | 0.15            |   |  |                         |  |  |             |  |  | 1.4      | 

8

---

The Company has adopted the fair value accounting for employee
stock options. The Company did not record any stock based compensation expense
during the three months ended December 31, 2010. The Black-Scholes
option-pricing model is used to calculate this expense. There are no further
stock based compensation expenses to be recorded based on options granted to
date and their existing terms and conditions. Multiplying the options by their
exercise price and dividing the total obtained by the total outstanding options
calculated the weighted average exercise price.

NOTE 7. WARRANTS

On April 12, 2010, the Company issued 3,740,150 warrants to
purchase 3,740,150 shares of Common Stock at $0.085 per share, expiring on April
11, 2015. The warrants were issued in exchange for financial advisory services
to be provided from the period from April 11, 2010 until September 30, 2010. The
total fair value of the warrants has been estimated to be $262,090 using the
Black-Scholes option pricing model based on the following assumptions: dividend
yield of 0%, expected volatility of 103.86%, risk-free interest rate of 3%, and
an expected life of 5 years. The company recorded $262,090 in stock based
compensation for the year ended September 30, 2010. There were no warrants
exercised nor issued during the three months ended December 31, 2010. The
Company has the following warrants outstanding to purchase shares of Common
Stock as of December 31, 2010:

Outstanding as at
      June 30, 2010
    Issue Date
    Exercise Price
      $
    Share Price
      on Grant Date $
    Expiry Date
    Remaining
      Contractual Life (Years)
    Reason for Issuance3,000,000
    4/1/2009
    0.03
    0.03
    3/31/2014
    3.25
    Issued in
      exchange for financial advisory services.3,740,150
    4/12/2010
    0.085
    0.085
    4/11/2015
    4.28
    Issued in exchange for
      financial advisory services.Total
    
    Weighted
      
    Average 
    Exercise 
    Price
    
    
    Weighted
      
    Average 
    Contractual 
    Life (Years)6,740,150
    
    0.06
    
    
    3.765


NOTE 8: RELATED PARTY TRANSACTIONS

The Company sources some of its funding in the form of
promissory notes from Michael Lee  President and CEO. The Company is indebted
to Mr. Lee in the amount of $62,236 including accrued interest of $13,975 as of
December 31, 2010. The directors did not loan any funds to the Company during
the three months ended December 31, 2010. These promissory notes bear interest
at 12% per annum and are unsecured.

NOTE 9: RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS

In December 2007, the FASB updated FASB ASC Subtopic 810-10,
Consolidation(formerly SFAS No. 160). This guidance establishes
accounting and reporting standards for non-controlling interests in
subsidiaries. The guidance clarifies that a non-controlling interest in a
subsidiary be accounted for as a component of equity, but separate from the
parents equity. Furthermore, the amount of consolidated net income
attributable to the parent and the non-controlling interest must be clearly
identified and presented on the face of the Consolidated Statements of
Operations. The Company adopted the provisions of the guidance effective October
1, 2009 and the provisions are being applied prospectively, except for the
presentation and disclosure requirements, which have been applied
retrospectively. The adoption did not have a material impact on our consolidated
financial statements.

9

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Recent Issued Standards

FASB ASC Update No. 2009-05 - In August 2009, the FASB
issued ASC Update No. 2009-05, Fair Value Measurements and Disclosures (Topic
820): Measuring Liabilities at Fair Value (ASC Update No. 2009-05). This
update amends ASC 820, Fair Value Measurements and Disclosures and provides
further guidance on measuring the fair value of a liability. The guidance
establishes the types of valuation techniques to be used to value a liability
when a quoted market price in an active market for the identical liability is
not available, such as the use of an identical or similar liability when traded
as an asset. The guidance also further clarifies that a quoted price in an
active market for the identical liability at the measurement date and the quoted
price for the identical liability when traded as an asset in an active market
when no adjustments to the quoted price of the asset are required are both Level
1 fair value measurements. If adjustments are required to be applied to the
quoted price, it results in a level 2 or 3 fair value measurement. The guidance
provided in the update is effective for the first reporting period (including
interim periods) beginning after issuance. The Company does not expect that the
implementation of ASC Update No. 2009-05 will have a material effect on its
financial position or results of operations.

FASB ASC Update No. 2009-12 - In September 2009, the
FASB issued ASC Update No. 2009-12, Fair Value Measurements and Disclosures
(Topic 820): Investments in Certain Entities that Calculate Net Asset Value per
Share (or Its Equivalent) (ASC Update No. 2009-12). This update sets forth
guidance on using the net asset value per share provided by an investee to
estimate the fair value of an alternative investment. Specifically, the update
permits a reporting entity to measure the fair value of this type of investment
on the basis of the net asset value per share of the investment (or its
equivalent) if all or substantially all of the underlying investments used in
the calculation of the net asset value is consistent with ASC 820. The update
also requires additional disclosures by each major category of investment,
including, but not limited to, fair value of underlying investments in the major
category, significant investment strategies, redemption restrictions, and
unfunded commitments related to investments in the major category. The
amendments in this update are effective for interim and annual periods ending
after December 15, 2009 with early application permitted. The Company does not
expect that the implementation of ASC Update No. 2009-12 will have a material
effect on its financial position or results of operations.

In March 2010, the FASB issued new accounting guidance on
embedded credit derivatives. This new accounting guidance clarifies the scope
exception for embedded credit derivatives and defines which embedded credit
derivatives should be evaluated for bifurcation and separate accounting. The
Company does not expect that the implementation of this new accounting guidance
will have a material effect on its financial position or results of
operations.

FASB ASC Update No. 2010-22 -The FASB has issued FASB
Accounting Standards Update (ASU) No. 2010-22, Accounting for Various Topics.
ASU 2010-22 amends various SEC paragraphs in the FASB Accounting Standards
CodificationTM (Codification) based on external comments received and the
issuance of Staff Accounting Bulletin (SAB) No. 112 , which amends or rescinds
portions of certain SAB topics. Specifically, SAB 112 was issued to bring
existing SEC guidance into conformity with: Codification Topic 805, Business
Combinations (originally issued as FASB Statement No. 141 (Revised December
2007), Business Combinations); and Codification Topic 810, Consolidation
(originally issued as FASB Statement No. 160, Noncontrolling Interests in
Consolidated Financial Statements).

FASB ASC Update No. 2010-29 -The FASB has issued ASU
2010-29, Business Combinations (Topic 805): Disclosure of Supplementary Pro
Forma Information for Business Combinations. This amendment affects any public
entity as defined by Topic 805, Business Combinations, that enters into business
combinations that are material on an individual or aggregate basis. The
comparative financial statements should present and disclose revenue and
earnings of the combined entity as though the business combination(s) that
occurred during the current year had occurred as of the beginning of the
comparable prior annual reporting period only. The amendments also expand the
supplemental pro forma disclosures to include a description of the nature and
amount of material, nonrecurring pro forma adjustments directly attributable to
the business combination included in the reported pro forma revenue
and earnings. The amendments are effective prospectively for business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2010. The
adoption of the ASU 2010-29 will not have material impact to the financial
statements of the Company.

10

---

NOTE 10: PROPOSED RESTRUCTURING

On April 9, 2010 AlphaRx Canada Limited (ACL), a wholly-owned
subsidiary of the Company signed a non-binding letter of intent with Pacific
Orient Capital Inc. (POC), a Capital Pool Company listed on the Toronto
Venture Exchange, whereby POC will effect a Qualifying Transaction (the
Transaction), as such term is defined under the policies of the Toronto
Venture Exchange (the Exchange), by acquiring all of the shares of ACL that
are issued and outstanding at the time of closing of the transaction. The letter
of intent was subsequently amended on June 9, 2010. The transaction is to be
completed by a) the acquisition of ACL by way of a share exchange through the
issuance of one common share of POC for every common share of ACL at a deemed
price of CAD$0.40 per share; and b) the acquisition by AlphaRx International
Holdings Ltd. (AIH), the Companys 80% owned subsidiary, of an exclusive,
royalty free licence from the Company, to commercialize the prescription drug
Indaflex in Mexico and Asia for a period of 15 years; and c) the acquisition of
a sub-licence by POC from AIH to commercialize the prescription drug Indaflex in
Mexico and Asia for 8,250,000 Common shares of POC at a deemed price of CAD$0.40
per share. The transaction, among other conditions, shall be conditional upon
the completion of a concurrent public offering or private placement of CAD $1.5
million of shares of common stock at a value of no less than CAD $0.60 per
share. In relation thereto the Company has received a non-refundable deposit
during April, 2010 of CAD $25,000 to assist in the restructuring. Completion of
the proposed Transaction is conditional on the execution of a definitive
agreement to be negotiated by the parties, acceptance and approval by the
Exchange and the satisfaction of the minimum listing requirements of the
Exchange. As of August 19, 2010 (review completion date), the Company has not
yet received approval and acceptance by the Exchange and as a result, the
interim consolidated financial statements do not purport to give effect to any
adjustments that will be required should the Transaction be accepted and
completed.

NOTE 11. TRANSACTION ADJUSTMENTS

Additional accumulated differences derived from the beginning
balances of Non-controlling Interest and Additional-paid-in capital carryover
from previous periods is adjusted to reflect the correct balancing figures. This
adjustment is a change of accounting estimation on applicable foreign exchange
rate on various transactions and its carryover effects. This change of
estimation is not material and has no impact on current period statement of
income or operation results.

NOTE 12. RECLASSIFICATIONS

Certain amounts from prior year have been reclassified to
conform to current years presentation.

NOTE 13. SUBSEQUENT EVENTS

Management has reviewed subsequent events through the date of
filing the Quarter Report on Form 10-Q that includes these interim consolidated
financial statements with the US Securities and Exchange Commission. There were
no material subsequent events as at February 14, 2011 that would require
recognition or note disclosure in these financial statements.

11

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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION

The following discussion should be read in conjunction with the
information contained in the consolidated financial statements of the Company
and the notes thereto appearing elsewhere herein and in conjunction with the
Management's Discussion and Analysis of Financial Condition and Results of
Operations set forth in the Company's Annual Report on Form 10-K for the year
ended September 30, 2010. Readers should carefully review the risk factors
disclosed in this Form 10-K and other documents filed by the Company with the
SEC.

As used in this report, the terms "Company", "we", "our" and
"us" refer to AlphaRx, Inc., a Delaware corporation.

PRELIMINARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Report contains forward-looking statements within the
meaning of the federal securities laws. These include statements about our
expectations, beliefs, intentions or strategies for the future, which we
indicate by words or phrases such as "anticipate," "expect," "intend," "plan,"
"will," "we believe," "management believes" and similar language. The
forward-looking statements are based on the current expectations of the Company
and are subject to certain risks, uncertainties and assumptions, including those
set forth in the discussion under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in this report. Actual results
may differ materially from results anticipated in these forward-looking
statements. We base the forward-looking statements on information currently
available to us, and we assume no obligation to update them.

Investors are also advised to refer to the information in our
previous filings with the Securities and Exchange Commission (SEC), especially
on Forms 10-K, 10-Q and 8-K, in which we discuss in more detail various
important factors that could cause actual results to differ from expected or
historic results. It is not possible to foresee or identify all such factors. As
such, investors should not consider any list of such factors to be an exhaustive
statement of all risks and uncertainties or potentially inaccurate assumptions.

General

AlphaRx is a specialty pharmaceutical company dedicated to
developing proven therapies by reformulating FDA approved and marketed drugs
which through the application of its proprietary site-specific nano drug
delivery technology, offers improved medical benefits and a potential for
significant commercial product development. Our core competence is in the
development of novel drug formulations for therapeutic molecules or compounds
that have exhibited poor gastro intestinal absorption due to poor solubility or
have yet be administrable to the human body with an acceptable delivery method.
Our nano drug delivery system is versatile and offers significant flexibility in
the development of suitable dosage formulations (i.e. oral, topical or
parenteral) to meet the requirements of specific drug molecules.

Since 2000, substantial efforts and resources have been devoted
to understanding our nano drug delivery technology and establishing a product
development pipeline that incorporated this technology with selected molecules.
Since 2008, AlphaRx has undergone many positive changes. New corporate
initiatives for China and a corresponding strategic growth plan were
implemented; our corporate strategy was refocused on commercializing our nano
drug delivery technology as quickly as possible, building high-value
partnerships and reprioritizing the product pipeline. Spending was redirected
and aggressive cost control initiatives were implemented. We continue to
investing in the further development of our nano drug delivery technology and to
actively seek collaborators and licensees to accelerate the development and
commercialization of products incorporating our nano drug delivery system in
exchange for milestone payments and royalties. Further development, exploration
and commercialization of the technology entail risk and operational expenses.
However, we have made significant progress on refocusing our efforts on
strategic development initiatives and cost control and continue to aggressively
seek to reduce non-strategic spending.

Although our product development program address various
pharmaceutical markets, including inflammation, stroke and pneumonia, we
constantly evaluate and reassess our development program, resulting in new
product candidates and discontinuing or delaying lower priority development
program. This development optimization process is essential for assembling a portfolio of short and long-term drug candidates,
in order to build a stable and sustainable revenue and profits for our Company.

12

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Recent Developments

On April 9, 2010, we entered into a non-binding letter of
intent with Pacific Orient Capital Inc. (Pacific), a Capital Pool Company
listed on the TSX Venture Exchange, concerning the proposed acquisition of
AlphaRx Canada Limited ("ACL"), a wholly owned subsidiary of the Company. The
letter of intent was subsequently amended on June 9, 2010. The proposed
acquisition, if completed, will constitute Pacific's qualifying transaction
pursuant to the policies of the TSX Venture Exchange Inc. (the "Exchange").

The qualifying transaction is to be completed by (a) the
acquisition of ACL by way of share exchange through the issuance of one common
share of Pacific for every one common share of ACL at a deemed price of C$0.40
per share; and (b) the acquisition by Pacific of a licence from AIH to
commercialize the prescription drug Indaflex in Mexico and Asia for 8,250,000
common shares of Pacific at a deemed price of C$0.40 per share (the
"Transaction"). Pacific has advanced $25,000 to the Company on a non-refundable
basis. Completion of the proposed Transaction is conditional on the execution of
a definitive agreement to be negotiated among the parties, the satisfactory
completion of due diligence, Exchange acceptance and the satisfaction of the
minimum listing requirements of the Exchange.

On June 28, 2010, we terminated our licensing agreement with
Cypress Biosciences (Cypress), our world-wide (except Mexico and Asia)
development partner for Indaflex. Despite the termination of Indaflex
development program with Cypress, we continue to develop Indaflex for the
Chinese market. We are currently working with our regulatory consultants,
pending availability of stability data, in preparation for submission of a
clinical trial application with the China State Food and Drug Association
(SFDA) in order to begin human trials in China. These preparations are
proceeding on schedule.

Our other product candidates in development are in earlier or
preclinical research phases, and we continue to assess them for their
compatibility with our technology and market need. Our intent is to seek
partnerships with pharmaceutical and biotechnology companies for certain of
these products. We plan to expand our pipeline with product candidates that
demonstrate significant opportunities for growth.

Overview of Results of Operations

|                                          |  |          |   |  |          |   |  |          |   |  |          |   |  |          |   |  |          |   |  |          |   |  |         | 
|----------------------------------------- |  | -------- | - |  | -------- | - |  | -------- | - |  | -------- | - |  | -------- | - |  | -------- | - |  | -------- | - |  | ------- | 
|Three                                     |  | Dec 31   |   |  | Sep 30   |   |  | June 30  |   |  | Mar 31   |   |  | Dec 31   |   |  | Sep 30   |   |  | June 30  |   |  | Mar 31  | 
|Months                                    |  | 2010     |   |  | 2010     |   |  | 2010     |   |  | 2010     |   |  | 2009     |   |  | 2009     |   |  | 2009     |   |  | 2009    | 
|Ended                                     |  | **$**    |   |  | **$**    |   |  | **$**    |   |  | **$**    |   |  | **$**    |   |  | **$**    |   |  | **$**    |   |  | **$**   | 
|                                          |  |          |   |  |          |   |  |          |   |  |          |   |  |          |   |  |          |   |  |          |   |  |         | 
|Net Sales                                 |  | 22,830   |   |  | 180,432  |   |  | 45,623   |   |  | 48,720   |   |  | 51,570   |   |  | 88,815   |   |  | 20,982   |   |  | 164,109 | 
|Net
      Income 
    (Loss)              |  | (191,351 | ) |  | (242,109 | ) |  | (157,366 | ) |  | (206,078 | ) |  | (122,518 | ) |  | (208,562 | ) |  | (235,695 | ) |  | 23,420  | 
|Net Income 
    (Loss) per 
    Share (1) |  | (0.01    | ) |  | (0.01    | ) |  | (0.01    | ) |  | (0.01    | ) |  | (0.01    | ) |  | (0.01    | ) |  | (0.01    | ) |  | 0.00    | 

NOTE (1) Net Loss per share on a quarterly basis does not equal
net Loss per share for the annual periods due to rounding.

13

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RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER
31, 2010, AS COMPARED TO THE THREE MONTHS ENDED DECEMBER 31, 2009

The Company incurred a net loss of $191,351 for the three month
period ended December 31, 2010 as compared to a net loss of $122,518 incurred
for the same period a year ago, an increase of $68,833. Revenues during the
three months ended December 31, 2010 were about $28,740 less than in the
previous period and general and administrative expenses were about $71,250 more
than in previous period. These two items were the primary cause for the increase
in net loss between periods.

Revenues

Total revenues for the three-month period ended December 31,
2010 were $22,830 as compared to $51,570 generated for the same period a year
ago, a decrease of $28,740 or about 56%. Royalty revenues were comparable year
over year at $22,830 for the three months ended December 31, 2010 as compared to
$51,570 for the same period a year ago, a decrease of $28,740 or about 56%. We
continue to pursue revenue opportunities in all forms (consulting, royalties and
license fees).

General and Administrative Expenses

General and Administrative expenses consist primarily of
personnel costs related to general management functions, finance, office
overheads, as well as insurance costs and professional fees related to legal,
audit and tax matters.

General and Administrative expenses were $169,728 for the three
month period ended December 31, 2010 as compared to $98,478 incurred for the
same period a year ago, an increase of $71,250 or about 72%. The increase is
primarily due to transaction costs associated with the proposed merger between
AlphaRx Canada Limited and Pacific Orient Capital Inc.

Research and Development Expenses

Research and development expenses include costs for scientific
personnel, supplies, equipment, and outsourced clinical and other research
activities.

Research and development expenses for the three months ended
December 31, 2010 were $13,646 as compared to $45,391 incurred for the same
period a year ago, a decrease of $31,745 or about 70%. The continuing strength
of the Canadian dollar continues keep out US Dollar costs high when translated.
Research efforts will again increase in the future depending on the timing and
availability of additional funds. We also seek collaborative partners in order
to obtain third party funding for certain drug candidates that show commercial
promise in exchange for commercialization rights.

Depreciation

Depreciation totalled $9,654 for the three months ended
December 31, 2010 as compared to $10,081 incurred during the same period a year
ago, a decrease of $427 or about 4.2%. Our capital asset purchases were
minimized during the last fiscal year. Certain assets are now fully depreciated
resulting in decreasing depreciation expense. Should any assets become
permanently impaired they are written off to income as determined.

Loss from Operations

Loss from operations were $170,198 for the three months ended
December 31, 2010 as compared to a net loss of $102,380 incurred for the same
period a year ago, an increase of $67,818 or about 66%.

Interest Expense

Interest expense for the three months ended December 31, 2010
was $25,054 as compared to interest expense of $19,835 generated during the same
period a year ago owing to the principle amount of loan is increasing.

14

---

Non-Controlling interest in gain/(loss) of Consolidated
Subsidiaries

We reflected a non-controlling interest income of $3,902 for
the three months ended December 31, 2010 as compared to a non-controlling
interest loss of $303 for the same period a year ago. Non-Controlling interest
represents our minority shareholders proportionate interest (which is 20%) in
our 80% owned subsidiary  AIH. The non-controlling interest resulted in the
investment in our subsidiary AlphaRx International Holdings Ltd. by an
independent third party  New Super Ltd. during June 2006. On 5/18/2010, New
Super Ltd. had infused an additional $173,237 in exchange of an additional 5%
ownership of our subsidiary AlphaRx International Holdings Ltd.

Net Loss

As a result of the above mentioned revenue and expense items,
we incurred a net loss of $191,351 for the three months ended December 31, 2010
as compared to a net loss of $122,518 generated in the same period a year
ago.

LIQUIDITY AND CAPITAL RESOURCES

As at December 31, 2010 the Company had a working capital
deficiency of $1,333,594 as compared to a working capital deficiency of
$1,146,910 as at September 30, 2010. The Company has also increased its
stockholders deficiency to $1,300,235 as at December 31, 2010 compared to a
stockholders deficiency of $1,103,832 as at September 30, 2010. We did not
issue any stock during the three months ended December 31, 2010.

We have a licensing arrangement with Andromaco, which provides
us with a small royalty stream. We also have licensing arrangements with Gaia
BioPharma Limited which may provide us with milestone payments and/or royalty
streams in the future. There is no assurance that such payments or royalty
streams will materialize.

Since inception, we have financed operations principally from
the sale of Common Stock and issuance of promissory notes and expect to continue
this practice to fund our ongoing activities.

We currently do not have sufficient resources to complete the
commercialization of any of our proposed products or to carry out our entire
business strategy. Therefore, we will likely need to raise substantial
additional capital to fund our operations in the future. We cannot be certain
that any financing will be available when needed on acceptable terms or at all.
Any additional equity financings will be dilutive to our existing stockholders,
and debt financing, if available, may require additional stock to be issued
and/or involve restrictive covenants on our business.

We expect to continue to spend capital on:

|1. | research and development programs;                                                                  
|-- | ----------------------------------------------------------------------------------------------------
|2. | preclinical studies and clinical trials;                                                            
|3. | regulatory processes; and                                                                           
|4. | third party licensees and distribution partners to manufacture and
      market our products for us.

The amount of capital we may need will depend on many factors,
including:

|1. | the progress, timing and scope of our research and development
      programs;                                  
|-- | ----------------------------------------------------------------------------------------------------------------
|2. | the progress, timing and scope of our preclinical studies and clinical
      trials;                            
|3. | the time and cost necessary to obtain regulatory approvals;                                                     
|4. | the time and cost necessary to establish or to retain sales and
      marketing partners to market our products;
|5. | the time and cost necessary to respond to technological and market
      developments; and                      
|6. | new collaborative, licensing and other commercial relationships that
      we may establish.                    

The inability to raise capital would have a material adverse
effect on the Company. We currently have no capital commitments other than one
leased auto and for certain research equipment.

15

---

CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS

Certain of the information contained in this document
constitutes forward-looking statements, including but not limited to those
with respect to the future revenues, our development strategy, involve known and
unknown risks, uncertainties, and other factors which may cause our actual
results, performance or achievements to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among others, the risks and
uncertainties associated with a drug delivery company which has not successfully
commercialized our first product, including a history of net losses, unproven
technology, lack of manufacturing experience, current and potential competitors
with significant technical and marketing resources, need for future capital and
dependence on collaborative partners and on key personnel. Additionally, we are
subject to the risks and uncertainties associated with all drug delivery
companies, including compliance with government regulations and the possibility
of patent infringement litigation, as well as those factors disclosed in our
documents filed from time to time with the United States Securities and Exchange
Commission.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK.

Not required for smaller reporting companies.

ITEM 4. CONTROLS AND PROCEDURES

Management assessed our internal control over financial
reporting as of December 31, 2010. Management based its assessment on criteria
established in Internal Control  Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO). Managements
assessment included an evaluation of the design of our internal control over
financial reporting and testing of the operational effectiveness of those
controls.

Based on this assessment, management has concluded that as of
December 31, 2010, our internal control over financial reporting was ineffective
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with U.S. generally accepted accounting principles. We noted that there is a
lack of segregation of certain duties at the Company due to the small number of
employees with responsibility for general administrative and financial matters.
This constitutes a deficiency in financial reporting. We therefore conclude that
our disclosure controls over financial reporting were ineffective as of and for
the three months ended December 31, 2010. At this time, management has decided
that considering the employees involved and the control procedures in place, the
risks associated with such lack of segregation of duties are insignificant and
the potential benefits of adding additional employees to clearly segregate
duties do not justify the additional expenses associated with such increases.
Management will periodically re-evaluate this situation. If the volume of
business increases and sufficient capital is secured, it is the Companys
intention to further increase staffing to mitigate the current lack of
segregation of duties within the general, administrative and financial
functions.

Changes in Internal Controls

Management has evaluated the effectiveness of the disclosure
controls and procedures as of December 31, 2010. Based on such evaluation,
management has concluded that the disclosure controls and procedures were
ineffective for their intended purpose described above. There were no changes to
the internal controls during the quarter ended December 31, 2010 that have
materially affected or that are reasonably likely to affect the internal
controls.

Limitation on the Effectiveness of Controls

A control system, no matter how well conceived and operated,
can provide only reasonable, not absolute, assurance that the objectives of the
control system are met. Because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that all
control issues, if any, within a company have been detected. Such limitations
include the fact that human judgment in decision-making can be faulty and that
breakdowns in internal control can occur because of human failures, such as
simple errors or mistakes or intentional circumvention of the established
process.

16

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PART II: OTHER INFORMATION

ITEM 1 - LEGAL PROCEEDINGS

There are currently no legal proceedings against the Company or
any of its subsidiaries.

ITEM 1A  RISK FACTORS

The following risk factors should be read carefully in
connection with evaluating our business and the forward-looking statements that
we make in this Report and elsewhere (including oral statements) from time to
time. Any of the following risks could materially and adversely affect our
business, our operating results, our financial condition and the actual outcome
of matters as to which forward-looking statements are made in this Report.

Financial Risks

- We have a history of operating losses and we may never achieve
  profitability. If we continue to incur losses or we fail to raise additional
  capital or receive substantial cash inflows from our major shareholders, we
  may be forced to cease operations.
- We may not be able to make the payments we owe to our creditor.
- The audit opinion issued by our independent registered public accounting
  firm relating to our financial statements for the year ended September 30,
  2010 contained a going concern explanatory paragraph.

Risks Related to our Business

- We are highly dependent on the clinical success of our product candidates.
- We are highly dependent upon collaborative partners to develop and
  commercialize compounds using our delivery agents.
- Our collaborative partners control the clinical development of certain of
  our drug candidates and may terminate their efforts at will.
- Our product candidates are in various stages of development, and we cannot
  be certain that any will be suitable for commercial purposes.
- Our collaborative partners are free to develop competing products.
- Our business will suffer if we cannot adequately protect our patent and
  proprietary rights.
- We may be at risk of having to obtain a license from third parties making
  proprietary improvements to our technology.
- We are dependent on third parties to manufacture and, in some cases, test
  our products.
- We are dependent on our key personnel and if we cannot recruit and retain
  leaders in our research, development, manufacturing, and commercial
  organizations, our business will be harmed.

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Risks Related to our Industry

- Our future business success depends heavily upon regulatory approvals,
  which can be difficult to obtain for a variety of reasons, including cost.
- We may face product liability claims related to participation in clinical
  trials for future products.
- We are subject to environmental, health and safety laws and regulations
  for which we incur costs to comply.
- We face rapid technological change and intense competition.

Other Risks

- Our disclosure controls & procedures and internal control over
  financial reporting were ineffective. In connection with managements
  assessment of the Companys disclosure controls & procedures and internal
  control over financial reporting, we identified the following material
  weakness in our disclosure controls & procedures and internal control over
  financial reporting as of December 31, 2010:

> Segregation of Duties:We did not maintain adequate
> segregation of duties related to job responsibilities for initiating,
> authorizing, and recording of certain transactions. Due to this material
> weakness, there is a risk that a material misstatement in the financial
> statements would not be prevented or detected on a timely basis. A deficiency in
> disclosure and internal controls may result in a loss of public confidence in
> the Company, which could have an adverse effect on our stock price.

ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS.

We did not issue nor sell any equity securities during the
three months ended December 31, 2010.

ITEM 3 - DEFAULTS UPON SENIOR SECURITIES

Not Applicable

ITEM 4 - (REMOVED AND RESERVED)

ITEM 5 - OTHER INFORMATION

Not Applicable

ITEM 6 - EXHIBITS

|(i)  |  | EXHIBITS.                                                                                                                                                                                                                                                                                              
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     |  |                                                                                                                                                                                                                                                                                                        
|31.1 |  | Certification of Chief
      Executive and Interim Chief Financial Officer required by Rule 13a-14(a)
      or Rule 15d-14(a) under the Securities Exchange Act of 1934, as amended.                                                                                                                   
|     |  |                                                                                                                                                                                                                                                                                                        
|32.1 |  | Certification of Chief
      Executive Officer and Interim Chief Financial Officer required by Rule
      13a- 14(b) or Rule 15d-14(b) under the Securities Exchange Act of 1934, as
    amended, and 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002.

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SIGNATURES:

Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.

DATED: February14, 2011

| | ALPHARx INC.                           
| | ---------------------------------------
| |                                        
| | By:
      /S/ Michael M. Lee           
| | Michael M. Lee, Chief Executive Officer
| |                                        
| | Directors:                             
| |                                        
| | By:
      /S/ Michael M. Lee           
| | Michael M. Lee, Director               
| |                                        
| | By:
      /S/ David Milroy             
| | Dr. David Milroy, Director             
| |                                        
| | By:
      /S/ Ford Moore               
| | Dr. Ford Moore, Director               

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